FX.co ★ Mexican Peso Slips on Narrowing US-Mexico Rate Spread Bets

The Mexican peso weakened to nearly 18.7 per USD from the three-week high of 18.5 reached on November 9th, as markets priced in a likely narrowing of the US–Mexico interest-rate differential. Stronger-than-expected US inflation data for October bolstered expectations of additional Federal Reserve rate hikes, a scenario that would compress the rate spread and reduce the appeal of peso-denominated carry trades.

Even so, recent domestic data limit the scope for further monetary easing by Banxico. Annual inflation accelerated to 3.75% from 3.45% in September, topping the 3.65% consensus forecast and moving further above Banxico’s 3% target. Core inflation inched up to 3.80% from 3.75%, roughly in line with expectations of 3.78%.

At its latest policy meeting, the central bank unexpectedly cut its benchmark rate to 6.25% and updated its forward guidance, indicating that rates are likely to remain at this new level for an “extended period.” Meanwhile, the Democratic Party’s victory in the US midterm elections may ease trade-related headwinds and support Mexican growth prospects.